deal or no deal?...during the upcoming fourth quarter conference call, we will carefully evalu-ate...

This issue: Stock Performance Pages 2-3 Portfolio Review Pages 4-5 Fundamentals Pages 6-7 Portfolio HI-Lites Pages 8-9 New Stock UnitedHealth Group 0 Under the Spotlight The TJX Companies Page 11 Oracle Page 12

Editor: Ingrid R. Hendershot, CFA September 2019 Volume 26 Issue 3

High volatility returned to the markets during the last quarter as the United States and China vacillated on whether the countries would reach a trade deal or not. Trade tensions, exacerbat-ed by additional tariffs and currency manipula-tion charges, are triggering a global economic slowdown due to heightened uncertainty. In response, central bankers around the world are lowering interest rates. We believe the U.S. and China will eventually reach a trade deal since it is in the best interest of both countries. Howev-er, the timing and the extent of the deal re-mains up in the air. Meanwhile, many of our HI-quality companies have been announcing or completing their own big deals. With any deal, questions arise as to whether the deal makes sense for sharehold-ers. Corporate history is replete with bad deals. Often the bigger the deal, the worse the out-come. Just think back to the following disas-trous mega-deals: America Online and Time Warner; MCI and Worldcom; and Sears and Kmart. The $36 billion Kraft Heinz deal completed in 2015 also appears like a blunder with more than $16 billion taken in subsequent impair-ment charges. Berkshire Hathaway owns 27% of Kraft Heinz. While Warren Buffett, chairman of Berkshire Hathaway, initially described the deal as “my kind of transaction,” he has since acknowledged that “we overpaid for Kraft.” When even the Oracle of Omaha occasionally stumbles on a big deal, it makes us ever more cautious about the wheeling and dealing of our HI-quality companies. Walgreens Boots Alliance, a merger of Walgreens and Boots Alliance, recently an-nounced plans to close about 200 locations in the U. S. following the Rite-Aid acquisition. The company currently estimates that it will incur cumulative pre-tax charges of approximately $1.9 billion to $2.4 billion as part of its transfor-mation initiative. During the upcoming fourth quarter conference call, we will carefully evalu-ate management’s outlook for fiscal 2020 as we gauge whether we need a new prescription.

Following the $71.3 billion acquisition of 21st Century Fox, Walt Disney reported fiscal third quarter sales increased 33% to $20.2 billion with net earnings declining 51% to $1.4 billion and EPS falling 59% to $0.79. These results include charges of $1 billion, or $0.56 per share, from goodwill amortization related to the 21st Century Fox and Hulu acquisitions, restructuring and integration charges plus impairment charges. Thor Industries reported third fiscal quarter sales motored ahead 11% to $2.5 billion with net income skidding 76% to $32.8 million and EPS dropping 77% to $0.59 due in part to the acqui-sition of Erwin Hymer Group for $2.2 billion (see p. 4 for more details). During the past quarter, AbbVie announced a $63 billion agreement to acquire Allergan. Aller-gan’s best known product is Botox. This big deal created frown lines for Mr. Market and us (see p. 4 for more details). Raytheon and United Technologies have en-tered into an agreement to combine in an all-stock merger of equals. The new company will be worth about $121 billion and will be named Raytheon Technologies Corporation. Raytheon shareowners will receive 2.3348 shares in the combined company for each Raytheon share held. Upon completion of the merger, United Technologies shareowners will own approxi-mately 57 percent and Raytheon shareowners will own approximately 43 percent of the com-bined company. The merger is expected to close in the first half of 2020, following comple-tion by United Technologies of the previously announced separation of its Otis and Carrier businesses. The combined company expects to return $18 billion to $20 billion of capital to shareowners in the first 36 months following completion of the merger. As shareholders in both companies, we will watch carefully how this merger flies. Individually, both stocks still appear attractively valued. Deal or no deal? It all depends on the terms of the deal. However, all deals should receive spe-cial scrutiny by stakeholders!

DEAL OR NO DEAL?

Hendershot Investments, Sept. 2019

STOCK PERFORMANCE Stock-Symbol

Business

Purchase Date(a) Price(b)

Price 8-19-19

Total (c) Return

Advice*

Comment

AbbVie-ABBV Pharmaceuticals 03-09-10 12-03-10

28.57 24.59

66.56 201% SELL Selling position (see p. 4)

Accenture-ACN Consulting 03-06-12 59.95 195.18 253% HOLD Free cash flow +19% to $4.2 billion year-to-date

Alphabet, Cl A-GOOGL Alphabet, Cl A-GOOGL Alphabet, Cl C-GOOG

Technology

06-10-11 06-08-15 06-10-11

256.38 546.47 254.89

1,200.44 1,198.45

167% 370%

BUY

New $25 billion share repurchase program; acquiring Looker for $2.6

billion in cash

Apple-AAPL Computers, iPhones 09-07-10 36.97 210.35 512% HOLD Services revenues +13% in 3Q to record $11.5 billion

Automatic Data Processing-ADP

Human capital mgmt. 03-09-16 85.62 168.96 107% HOLD Generated a 43% return on shareholders’ equity in fiscal 2019

Bank of Hawaii-BOH Financial services 12-3-18 79.30 83.40 7% BUY Generated an 18% return on average equity in the 2Q

Berkshire Hathaway-BRKB

Insurance/diversified 12-28-94! 03-10-00 03-17-00

21.56 27.45 34.13

200.94 654% BUY Free cash flow +3% in 1H to $10 billion; repurchased $2.1 billion of its common

stock

Biogen-BIIB Biotechnology 09-09-15 286.19 235.72 -18% BUY Repurchased $3.1 billion of its stock in first half of 2019

Booking Holdings-BKNG Online travel bookings 12-12-12 12-10-14

629.62 1,119.68

1,943.73 122% BUY Repurchased $5.5 billion of its stock in first half of 2019

Brown-Forman-BFB Liquor 03-10-00 4.25 58.49 1,511% HOLD Free cash flow +29% in fiscal 2019 to $681 million

Canadian National Railway-CNI

Railroad 06-28-15 58.05 93.17 69% BUY Expect double-digit EPS growth in 2019

Cisco Systems-CSCO Internetworking 03-12-97

5.78 48.50 858% HOLD Acquiring Acacia for $2.6 billion in cash

Cognizant Tech.-CTSH IT consulting 09-07-12 33.43 61.86 90% BUY In 1H, repurchased $1.8 billion of its stock and paid $232 million in dividends

F5 Networks-FFIV Network technology 09-09-15 121.84 129.68 6% BUY Ended 2Q with $1.15 billion in cash and no long-term debt

Facebook-FB Social media 06-04-18 193.35 186.17 -4% BUY Ended 2Q with $48.6 billion of cash and no long-term debt

FactSet Research-FDS Financial information 03-14-14 104.42 277.43 176% HOLD Increased dividend 12.5%, marking 14th consecutive year of dividend increases

Fastenal-FAST Industrial supplies 03-10-00 06-10-14 09-07-17

2.45 25.25 20.85

30.66 61% BUY Increased quarterly dividend 2%, with dividend currently yielding 3.0%

Gentex-GNTX Auto mirrors 12-08-15 16.29 26.56 72% HOLD Taking partial profits (see p. 4)

Genuine Parts-GPC Diversified distributor 03-10-00 09-09-15

20.81 84.10

90.35 51% BUY Expect 4.5%-5% sales growth in 2019 with EPS of $5.42 to $5.52

Hormel Foods-HRL Food 06-14-01 6.01 41.21 702% HOLD Lowered fiscal 2019 EPS outlook to $1.71 to $1.85

Johnson & Johnson-JNJ Healthcare products 03-10-00 09-10-18

35.48 137.52

132.25 44% BUY During 2Q paid $2.5 billion in dividends and repurchased $2 billion of its stock

3M-MMM Diversified 03-07-07 09-10-18

73.70 213.63

162.95 3% HOLD Expects to repurchase $1 billion to $1.5 billion of its stock in 2019

*All recommendations made in this newsletter may not be suitable for every account, depending on an individual’s investment objective, risk-tolerance and financial situation. It should not be assumed that recommendations will be profitable or will equal the performance of securities listed here or recommended in the past. Clients should contact Hendershot Investments, Inc. if there are any changes in your financial situation or investment objectives, or if you wish to impose, add or modify any reasonable restrictions to the management of your account. (a) Date purchased for Hendershot IRA. See personal trading restrictions footnote on page 3. ! Received BRKB shares following acquisition of FlightSafety Int’l in Dec ‘96 and Int’l Dairy Queen in Jan ‘98 ( b) Price includes commissions paid. (c) Total return includes dividends. NI-Net Income, Q-quarter, H-half, YTD-year-to-date, ROE-return on equity

www.hendershotinvestments.com

(continued) Stock-Symbol

Business

Purchase Date(a) Price(b)

Price 8-19-19

Total (c) Return

Advice*

Comment

Mastercard-MA Global payments 09-05-14 76.45 278.07 273% HOLD Acquiring the majority of corporate services of Nets for $3.2 billion

Maximus-MMS Business services 06-02-16 57.54 77.90 37% HOLD Free cash flow +35% to $225 million YTD

Microsoft-MSFT Software 06-07-07 12-03-10

30.16 26.94

138.41 437% HOLD Free cash flow increased 19% in fiscal 2019 to $38.3 billion

MSC Industrial-MSM Industrial distributor 03-07-18 90.58 69.93 -19% BUY Increased quarterly dividend 19%; dividend currently yields 4.4%

Nike-NKE Shoes and apparel 03-07-17 56.55 81.13 47% HOLD Generated a 45% return on shareholders’ equity in fiscal 2019

Oracle-ORCL Software 09-05-13 32.31 53.87 79% BUY Generated a 50% return on shareholders’ equity in fiscal 2019

Paychex-PAYX Payroll processing 12-03-10 08-31-11

29.49 27.28

82.29 242% HOLD Generated a 40% return on shareholders’ equity in fiscal 2019

PepsiCo-PEP Food and beverages 03-14-14 03-07-18

81.89 109.42

132.57 40% HOLD Acquiring Pioneer Foods for about $1.7 billion

Raytheon-RTN Defense 03-06-19 183.05 179.19 -1% BUY Merging with United Technologies (see p. 1)

Ross Stores-ROST Off-price retailer 06-08-17 61.70 104.09 72% BUY Opening 100 new stores

Starbucks-SBUX Coffee retailer 06-10-14 12-11-17

37.26 58.61

96.66 89% HOLD Increased 2019 sales and EPS outlook with sales growth of 7% and EPS of $2.86-$2.88

Stryker-SYK Medical technology 03-11-09 32.08 218.64 632% HOLD Raised 2019 sales outlook with 7.5%-8% organic sales growth expected

TD Ameritrade-AMTD Brokerage services 06-04-19 51.95 43.79 -16% BUY 2Q revenues +8%, EPS +27%; CEO is leaving company

T. Rowe Price-TROW Investment mgmt. 08-31-11 09-05-14

53.98 80.59

109.62 147% BUY Ended 2Q with $5.2 billion in cash and investments and no long-term debt

Thor Industries-THO Recreational Vehicles 06-04-18 95.06 46.28 -49% SELL Selling position (see p. 4)

The TJX Companies-TJX Off-price retailer 06-12-00 09-09-15

2.54 36.17

51.55 115% BUY Plans to repurchase $1.75 billion of its stock in fiscal 2020

Tractor Supply-TSCO Rural retailer 12-11-17 67.51 101.21 53% HOLD Free cash flow +69% in 1H to $265 million

Ulta Beauty-ULTA Beauty retailer 09-10-18 285.84 325.25 14% BUY Raised fiscal 2019 EPS outlook to $12.83-$13.03

United Parcel Service-UPS Package delivery 05-27-05 06-09-06 08-31-11

74.92 79.57 67.90

116.79 99%

BUY Reported best 2Q in company history with sales +3% to $18 billion and net income

+14% to $1.7 billion

United Technologies-UTX Diversified-building systems/aerospace

09-10-01 33.43 126.64 369% BUY Merging with Raytheon (see p. 1)

Walgreens Boots Alliance-WBA

Drugstores 09-12-08 06-08-17

36.38 81.83

51.16 -19% HOLD Increased dividend 4%, marking 44th straight year of dividend increases

Walt Disney-DIS Media/Entertainment 09-02-16 94.43 135.29 49% HOLD Paid $1.3 billion in dividends YTD and suspended share buyback program

PERSONAL TRADING RESTRICTIONS FOR PRINCIPALS AND EMPLOYEES I take a long-term position in each stock recommended in this newsletter. Having earned the Chartered Financial Analyst (CFA) designation, I fully subscribe to the Code of Ethics and Standards of Professional Conduct of the CFA Institute. Accordingly, transactions for client accounts have priority over personal and employee transactions. To avoid any conflict of interest and to be fair to both my individual clients and subscribers, personal and employee trading is restricted to just four weeks a year. Personal and employee trading will occur only during the week following distribution of the newsletter to subscribers unless otherwise approved by the Chief Compliance Officer. The week following distribution of the newsletter will be measured as five business days after the mailing date of the newsletter. Positions may be purchased or sold for individually managed client accounts at any time and without regard to recommendations made in this newsletter.


AbbVie reported second quarter revenues were relatively flat at $8.3 billion with net income declin-ing 63% to $741 million and EPS off 61% to $.49. These results in-cluded a $2.3 billion non-cash charge. On an adjusted basis, EPS increased 13% during the quarter to $2.26. Second quarter U.S. Humira reve-nues were $3.8 billion, an increase of 7.7%. Internationally, Humira net revenues were $1.1 billion, a de-cline of 31% operationally due to biosimilar competition. Second quarter global net revenues from the hematologic oncology portfolio were $1.3 billion, an increase of 39% with Imbruvica net revenues increasing 29% to $1.1 billion. Sec-ond quarter HCV net revenues de-clined 19% to $784 million. During the quarter, AbbVie an-nounced an agreement to acquire Allergan in cash and stock valued at approximately $63 billion. Aller-gan’s best known product is Botox. The news of this large acquisition sent AbbVie’s stock price down 18% during the last quarter, caus-ing us frown lines. Allergan’s profitability track record does not provide much to smile about with losses posted in four of the last six years and another loss expected in 2019. This large acqui-sition will also load up AbbVie’s already leveraged balance sheet with significantly more debt. AbbVie had expected to manage through the U.S. Humira patent cliff in 2023 through new products. However, it appears that recent shortfalls in research and develop-ment have led them to a debt-heavy acquisition instead, which is a bitter pill to swallow. With integra-tion and financial risks rising relat-ed to the acquisition, we decided to sell our position in AbbVie which has provided us with a healthy 201% total return over the last nine years.

PORTFOLIO REVIEW

DIVIDENDS

Since the last issue, the following dividends per share were received: AbbVie ($1.07), Apple ($.77), ADP ($.79), Bank of Hawaii ($.65), Brown-Forman ($.17), Canadian National ($.41), Cisco ($.35), Cognizant ($.20), FactSet Research ($.72), Fastenal ($.22), Gentex ($.12), Genuine Parts ($.76), Hormel Foods ($.21), Johnson & Johnson ($.95), Mastercard ($.33), Maximus ($.25), Microsoft ($.46), 3M ($1.44), MSC Industrial ($.75), Nike ($.22), Oracle ($.24), Paychex ($.62), Pepsi ($.96), Raytheon ($.94), Ross Stores ($.26), Starbucks ($.36), Stryker ($.52), T. Rowe Price ($.76), Thor Industries ($.39), TJX ($.23), Tractor Supply ($.35), United Parcel Services ($.96), United Technologies ($.74), Walgreen ($.44), and Walt Disney ($.88).

STOCK SPLIT Fastenal paid a 2 for 1 stock split on May 22, 2019 with all data adjusted accordingly.

Gentex reported second quarter net sales motored ahead by 3% to $469 million with EPS up 5% to $0.42. Despite the 8% drop in glob-al vehicle production, Gentex’s auto-motive sales increased 3% to $457 million. This 11% underlying market outperformance reflected strength in Full Display Mirror sales and domes-tic exterior auto-dimming mirror ship-ments, which jumped 12% to 3.5 million units. Management continues taking steps to mitigate the impact of tariffs by sourcing from suppliers manufacturing outside of China. Gentex ended the quarter with more than $572 million in cash and invest-ments on its sporty, debt-free bal-ance sheet. Over the past four years, Gentex has provided a sleek 72% total return. With the stock ap-pearing fully valued, we are trimming back our position and driving away with some shiny profits.

******* With the proceeds from Thor Indus-tries and the profits from AbbVie, and Gentex, we plan to buy United-Health Group (see p. 10). Personal and employee purchases will be made during the week following dis-tribution of this newsletter. (See Per-sonal Trading restrictions in the box on p. 3.)

Thor Industries reported sales from the acquisition of Erwin Hymer Group (EHG) added $767.5 million to total company sales in the third quarter. This sales boost was par-tially offset by a 23.1% decrease in North American Towable RV sales to $1.2 billion and a 23.3% decline in North American Motorized RV sales to $459 million amid an indus-try-wide downturn. The stalling of North American sales reflects independent dealer inventory rationalization, as dealers continued to reduce inventory lev-els to better match ongoing retail demand for RVs in North America. Gross margin declined by 240 basis points to 11.7%, flattened by the step-up in EHG inventory sold dur-ing the quarter to fair value based on the acquisition price, which in-creased cost of goods sold. Rising tariffs are also impacting costs. As a result of lower wholesale ship-ments relative to retail demand, Thor’s North American independent dealer inventory levels decreased by 20.3% to 132,500 units, com-pared to 166,200 units as of April 30, 2018. North American RV back-log fell 30% to $1.4 billion. Operating cash flow during the quarter fell 11% to $175.8 million. While Thor Industries has paid down about $255 million of acquisi-tion-related debt, total long-term debt at quarter end is $2.2 billion, representing a still high 107% of shareholders’ equity. Based on cur-rent trends, management expects that the North American retail mar-ket will be softer for the remainder of calendar 2019. Given the industry downturn, lower cash flows and the increased debt taken on from the acquisition, Thor’s business fundamentals have deteriorated. This is leading us to sell our position in Thor Indus-tries at a 49% loss, making us unhappy campers.

UNHAPPY CAMPERS AT THOR INDUSTRIES

ABBVIE’S ACQUISITION CAUSES FROWN LINES

GENTEX SHINY PROFITS


(continued)

REALIZED GAINS AND LOSSES OVER THE LAST 12 MONTHS

COMPANY DATE PURCHASED

DATE SOLD

GAIN/LOSS

COMMENT*

APPLE 09/07/10 09/10/18 +487% Fully valued, trimmed position

EXPRESS SCRIPTS 12/13/96 03/09/11

09/10/18 09/10/18

+7,527% +67%

Acquired by Cigna

POLARIS 09/09/15 12/28/15

03/06/19 03/06/19

-27% Sold position due to declining earnings and cash flow and in-creasing debt

STARBUCKS 06/10/14 12/3/18 +81% Fully valued, trimmed position

TRACTOR SUPPLY 12/11/17 03/06/19 +39% Fully valued, trimmed position

WALT DISNEY 09/02/16 06/04/19 +41% Fully valued, trimmed position

WESTWOOD HOLDINGS 12/08/11 08/10/15

06/04/19 -39% Assets under management, sales and earnings dropped signifi-

cantly, sold position

Hendershot Investments, Inc. Investment Advisory Services Founded in 1994, Hendershot Investments’ personalized portfolio management service exists to help you improve your long-term fi-nancial success and to conserve and grow your wealth. To that end, we invest in high-quality, well-managed companies at reasonable valuations and hold them for the long term. We extend a big “thank you” for the many client and subscriber referrals, as a referral is the biggest compliment you can pay us!

We find great businesses at reasonable prices through extensive research.

As long-time students of the stock market, we have developed valuation models to assess the relative merits of HI-quality companies. We scour annual reports, SEC filings and news to independently deter-mine company valuations, thereby avoiding the pitfalls of herd-mentality investing. Quarterly earnings conference calls with management keep us abreast of corporate developments and give us insight into the heartbeat of corporate leadership.

We adhere steadfastly to rigor-ous buy and sell disciplines.

Our number one rule on the buy side is “Don’t overpay for a stock.” We want to buy with a margin of safety. We would rather pay a “fair price for a great business than a great price for a fair business.”

As Philip Fisher stated, “If the job has been done correctly when a stock is purchased, the time to sell is almost never.”

We believe in patient investing for the long term.

Quintessential investor, Ben Graham, de-scribed the stock market in the short term as an imperfect voting machine where stock prices are based partly on emotion and partly on reason. In the long term, the stock market is a weighing machine where prices are driven by fundamentals. For this reason, we are willing to wait pa-tiently until Mr. Market recognizes the value of our HI-quality firms.

Our Investment Discipline

*A stock meets our price target by reaching its near-term full value based on its expected price range over the next 12-18 months (see pages 6 and 7). When a stock reaches our price target, we generally sell half the position and reinvest the proceeds into other promising opportunities. The remaining shares are held for further potential long-term gains as intrinsic value grows over time. Stocks are also sold if business fundamentals deteriorate or better investment opportunities are available.


COMPANY SYMBOL

EXP. ** PRICE

RANGE

PRICE 8-19-19

This year

Actual EPS

Next year Est. EPS

Current

P/E

PRICE/ BOOK VALUE

PRICE/ SALES

DIV.

YIELD

SALES 4-YR

CAGR*

EPS 4-YR

CAGR*

Return

on Equity

Cash/ Equity

Debt/

Equity

Current

Ratio

SALES (000)

AAPL 153-234 210.35 $11.91 $11.67 17.9 9.9 3.6 1.5% 10% 17% 56% 218% 88% 1.3x $265,595,000

ACN 143-199 195.18 6.34 7.34 27.9 9.1 3.1 1.5 7% 9% 38% 37 0 1.3 39,573,450

ADP 128-174 168.96 5.24 6.16 32.2 13.6 5.2 1.9 7% 16% 43% 36 37 1.4 14,175,200

AMTD 45-62 43.79 2.59 4.02 11.6 2.8 6.6 2.7 15% 16% 18% 48 42 1.2 5,452,000

BF.B 44-57 58.49 1.48 1.73 33.8 17.0 8.5 1.2 -5% 8% 51% 19 139 3.9 3,248,000

BIIB 242-385 235.72 21.58 30.17 8.8 3.5 3.4 - 9% 15% 34% 33 49 2.5 13,452,900

BKNG 1881-2397

1,943.73 83.26 97.94 21.6 15.6 5.7 - 15% 16% 46% 215 110 1.3 14,527,000

BOH 71-95 83.40 5.23 5.60 15.2 2.6 5.2 3.1 3% 9% 17% n/a n/a n/a 655,275

BRK.B ! 204-247 200.94 13,236 15,500 19.8 1.3 2.0 - 7% 7% 1% n/a n/a n/a 247,837,000

CNI 81-110 93.17 5.87 6.12 14.8 3.8 4.7 1.8 29% 11% 25% 1 64 0.7 14,321,000

CSCO 34-47 48.50 2.61 2.84 18.6 6.2 4.0 3.0 1% 11% 35% 100 43 1.5 51,904,000

CTSH 63-84 61.86 3.60 3.72 17.1 3.2 2.1 1.3 12% 11% 18% 14 7 2.6 16,125,000

DIS 103-144 135.29 8.36 5.76 18.0 2.7 4.1 1.3 5% 18% 26% 7 40 0.7 59,434,000

FAST 27-38 30.66 1.31 1.37 23.1 7.0 3.5 3.0 7% 12% 33% 7 20 4.7 4,965,100

FB 163-268 186.17 7.57 6.36 31.6 5.0 8.0 - 45% 62% 26% 55 0 4.5 55,838,000

FDS 211-328 277.43 6.78 8.96 32.6 16.5 8.0 1.1 10% 8% 51% 54 88 2.9 1,350,145

FFIV 135-207 129.68 7.32 7.28 16.9 4.8 3.6 - 6% 16% 35% 71 0 1.4 2,161,407

GNTX 19-28 26.56 1.62 1.68 16.2 3.6 3.7 1.8 7% 13% 24% 30 0 5.2 1,834,064

GOOGL!! 1211-1578

1,200.44 43.70 48.78 22.0 4.3 6.1 - 20% 22% 17% 69 2 4.0 136,819,000

GPC 96-124 90.35 5.50 5.48 16.6 3.6 0.7 3.4 5% 5% 23% 15 78 1.3 18,735,073

HRL 37-48 41.21 1.86 1.73 22.6 3.6 2.3 2.0 1% 8% 17% 5 19 1.8 9,545,700

JNJ 123-157

132.25 5.61 6.20 21.9 5.7 4.3 2.9 2% 0% 26% 25 46 1.3 81,581,000

MA 221-323 278.07 5.60 7.62 42.8 55.7 18.7 .5 12% 16% 100% 130 156 1.5 14,950,000

PORTFOLIO FUNDAMENTALS

** Exp. price range—the expected price range for the stock in the next 12-18 months based on our valuation models and the historical trading range of the stock over the last five years. If the current price is below the low end of the expected range, the stock appears undervalued. If the current stock price is above the high end of the expected range, the stock appears overvalued. The expected price range will change based upon company developments. Highlighted stocks appear undervalued or are new additions. !Berkshire price is for the class B shares, the class A shares approximate 1500 times the B shares. !!GOOGL (the original class A share price is used for the table. GOOGL will typically trade slightly higher than the Class C non-voting shares (GOOG).


COMPANY SYMBOL

EXP. ** PRICE

RANGE

PRICE 8-19-19

This Year

Actual EPS

Next Year Est. EPS

Current

P/E

PRICE/ BOOK VALUE

PRICE/ SALES

DIV.

YIELD

SALES 4-YR

CAGR*

EPS 4-YR

CAGR*

Return

on Equity

Cash/ Equity

Debt/

Equity

Current

Ratio

SALES (000)

MMM 180-249

162.95 $8.89 $8.41 19.7 9.2 2.9 3.6% 1% 4% 55% 30% 147% 1.9x $32,765,000

MMS 67-86 77.90 3.35 3.73 21.2 4.1 2.1 1.4 9% 12% 20% 6 0 2.1 2,392,236

MSFT 84-122 138.41 5.06 5.23 27.4 10.3 8.4 1.4 8% 36% 38% 131 65 2.5 125,843,000

MSM 74-103 69.93 5.80 5.24 13.2 2.7 1.2 4.4 4% 11% 24% 3 20 2.5 3,203,878

NKE 67-93 81.13 2.49 2.90 32.6 3.5 3.3 1.1 6% 8% 20% 52 38 2.1 39,117,000

ORCL 53-70 53.87 2.97 3.50 24.8 8.2 4.7 1.7 1% 8% 50% 169 231 2.5 39,506,000

PAYX 66-86 82.29 2.86 3.09 28.8 11.3 7.8 3.0 8% 12% 40% 43 30 1.8 3,772,500

PEP 114-144

132.57 5.66 5.52 22.5 13.3 2.9 3.0 -1% 7% 86% 26 199 0.9 64,661,000

ROST 94-128 104.09 4.26 4.51 24.2 11.8 2.6 1.0 8% 18% 48% 42 87 1.3 14,983,541

RTN 167-221

179.19 10.15 11.73 16.5 4.1 1.9 2.1 4% 10% 25% 18 35 1.5 27,058,000

SBUX 65-106 96.66 1.97 2.82 62.4 n/a 5.2 1.5 11% 15% 100% n/a n/a 1.3 22,386,800

SYK 147-198

218.64 9.34 5.21 23.4 6.8 6.0 1.0 9% 62% 30% 15 67 2.1 13,601,000

TJX 55-69 51.55 2.43 2.62 20.9 11.8 1.6 1.8 8% 12% 44% 41 42 1.3 38,972,934

TROW 97-134 109.62 7.27 7.81 13.8 3.9 4.8 2.8 8% 12% 30% 67 0 n/a 5,372,600

TSCO 79-122 101.21 4.31 4.74 22.5 7.9 1.5 1.2 8% 13% 34% 7 30 1.5 7,911,046

ULTA 317-445

325.25 10.94 12.97 28.3 9.8 2.8 - 20% 29% 36% 27 85 1.9 6,716,615

UNH 227-312

244.71 12.19 14.08 12.3 2.0 1.0 1.8 15% 21% 22% 95 62 0.7 226,247,000

UPS 100-137

116.79 5.51 7.26 21.3 22.9 1.4 3.3 5% 14% 100% 100+ 100+ 1.1 71,861,000

UTX 124-161

126.64 6.50 8.03 20.8 2.5 1.6 2.4 4% -1% 14% 16 88 1.0 66,501,000

WBA 51-90 51.16 5.05 5.05 10.1 1.9 0.4 3.6 15% 26% 19% 3 49 0.8 131,537,000

(continued)

* CAGR-Compound Annual Growth Rate. n/a-not applicable due to financial stock or equity less than zero. Estimated EPS reflects consensus earnings estimate for current fiscal year. The valuation measures (P/E, price-to-book value, price-to-sales and dividend yield) are calculated using the closing price on the date listed in column 3. Balance sheet ratios (cash/equity, debt/equity and current ratio) reflect the latest quarterly financial statements. Return on equity and sales figures are as of the company’s most recent fiscal year end.


During the past three months, the S&P 500 Index rose 2.1% despite renewed concerns over a trade war and slowing global growth. The following HI-quality stocks all generated solid 9% or better gains during the same period.

Starbucks reported fiscal third quarter sales perked 8% higher to $6.8 billion with net income jumping a jolting 61% to $1.4 billion. Global same store sales increased 6% with a 3% increase in average ticket and transactions. During the quarter, Starbucks repurchased 6.8 million shares and paid a cash quarterly dividend of $0.36 per share, up 20% from last year. For the full fiscal 2019 year, Starbucks expects global revenue growth of 7% on comparable store sales growth of 4% with EPS expected in the range of $2.86 to $2.88. The company expects to open about 2,000 net new Starbucks stores for the full fiscal 2019 year. Over the past five years, Starbucks has brewed up strong results with the stock more than doubling. Hold.

UPS reported second quarter revenues rose 3% to $18.0 billion with net income trucking 14% higher to $1.7 billion. This was the best quarterly performance in the company’s history. Rising demand for next-day services led to these strong financial results as U.S. daily volume grew over 7% with next-day air volume soaring over 30%, the best performance in a decade. During the first half, UPS paid $1.7 billion in dividends and repurchased 4.8 million shares for $500 million. For the full 2019 year, UPS expects adjusted EPS between $7.45 to $7.75. During the past quarter, UPS’ stock ascended 17%. Buy.

Stryker reported second quarter sales increased a healthy 10% to $3.7 billion with net income increasing 6% to $480 million. During the first half of the year, Stryker generated $540 million in free cash flow. Stryker ended the quarter with $1.8 billion in cash (including 40% held outside the U.S.), $8 billion in debt and $12 billion in shareholders’ equity. Acquisitions remain the number one priority for cash as Stryker continues building its robust product pipeline. For the full 2019 year, organic net sales growth is expected in the range of 7.5% to 8% with adjusted EPS expected in the range of $8.15 to $8.25. Over the past decade, Stryker has provided a striking 632% total return. Hold.

Apple reported fiscal third quarter revenues increased 1% to $53.8 billion with net income down 13% to $10 billion. The company set an all-time record for Services with revenues of $11.5 billion, an increase of 13% over the prior year period. Apple has over 420 million paid subscribers to its services, an increase of 30 million in the last quarter alone. Thanks to strong growth of Apple watches and Airpods, Apple also set a new record for Wearables, Home and Accessories with revenues of $5.5 billion, an increase of 48%. Year-to-date, Apple has paid $10.6 billion in dividends and repurchased $49.5 billion of its shares. Apple ended the quarter with $211 billion of cash and marketable securities on its fruitful balance sheet and $108 billion in long-term debt. Over the past nine years, Apple has provided a juicy 512% total return. Hold.

Booking Holdings reported second quarter revenues rose 9%, or 14% on a constant currency basis, to $3.9 billion with EPS traveling 11% higher to $22.44. The company significantly reduced its shares outstanding through a substantial share buyback program, including $5.5 billion of its common shares repurchased during the first half of the year. Booking Holdings ended the quarter with $11.4 billion in cash and investments, $7.7 billion in long-term debt and $5.3 billion in shareholders’ equity. For the full 2019 year, Booking Holdings expects low double-digit EPS growth as the company continues to gain market share. Over the past seven years, Booking Holdings’ stock has soared by more than tripling in price. Buy.

Mastercard reported strong second quarter results with revenues up 12%, or 15% on a constant currency basis, to $4.1 billion and net income charging 31% higher to $2.0 billion with EPS ringing up 33% growth. Free cash flow increased 14% during the first half of the year to $2.7 billion with the company paying dividends of $677 million and repurchasing $3.7 billion of its shares outstanding. For the full 2019 year, Mastercard expects to report revenue growth in the low teens with operating expenses up in the high single-digits, implying further profit margin expansion. Subsequent to quarter end, Mastercard announced it has entered into an agreement to acquire the majority of the Corporate Services businesses of Nets, a leading European PayTech company, for approximately $3.2 billion. Stay tuned for how this acquisition pays off for investors. Over the past five years, Mastercard has charged up a hefty 273% total return. Hold.

PORTFOLIO HI-LITES QUARTERLY

MOVERS AND SHAKERS

STRYKER STRIKING TOTAL RETURN

STARBUCKS BREWING STRONG RESULTS

BOOKING HOLDINGS $5.5 BILLION SHARE BUYBACK

APPLE $103 BILLION IN NET CASH

UPS BEST QUARTER IN HISTORY

MASTERCARD $3.2 BILLION ACQUISITION


(continued)

The good news is that several of our HI-quality companies have come back into buying territory thanks to more attractive valuations based on the outlook for 2020 earnings.

Canadian National Railway reported second quarter revenues chugged ahead by 9% to a record C$4.0 billion with net income up 4% to C$1.4 billion and EPS up 6% to C$1.88. The increase in revenues was mainly due to the TransX acquisition, the positive translation impact of a weaker Canadian dollar, freight rate increases and higher petroleum crude and grain volumes that were partly offset by lower volumes of frac sand, lumber and potash. Operating expenses for the second quarter increased by 8% to C$2.3 billion, driven by the inclusion of TransX and higher costs resulting from increased volumes of traffic. During the quarter, the company generated C$533 million in free cash flow, down 37% from last year, mainly due to upfront delivery of locomotives and TransX investing activities. Canadian National Railway returned C$832 million to shareholders during the quarter through dividend payments of C$387 million and share repurchases of C$445 million. For 2019, management expects to deliver earnings per share growth in the low double-digit range. Dividends are expected to rise 18% over last year with a targeted 35% payout ratio as dividends grow in line with earnings growth. Financial targets for 2020 through 2022 for Canadian National Railway include low double-digit annualized earnings per share growth. Return on invested capital is expected in the 15% to 17% range with free cash flow growing faster than earnings. Buy.

Fastenal reported second quarter sales increased 8% to $1.4 billion with net income and EPS each down 3% to $204.6 million and $.36, respectively. Adjusting for a one-time tax gain in 2018, adjusted EPS would have been up 1.5%. While manufacturing daily sales were up 9% in the second quarter, weakness in heavy machinery was a bit more pronounced and the oil and gas industry remains challenging for customers. Non-residential construction daily sales were up 7% with smaller construction customers weaker than large ones. During the first half, Fastenal paid $246.1 million in dividends, a 16% increase over last year. Subsequent to quarter end, Fastenal announced a two percent additional increase in the quarterly dividend to $.22 per share with the dividend currently yielding 3.0%. Buy.

Johnson & Johnson reported revenues declined 1% to $20.6 billion in the second quarter with EPS up a healthy 43% to $2.08. Excluding the overall impact of acquisitions, divestitures and currency, adjusted operational sales growth increased 4% with adjusted EPS up 23%. During the quarter, JNJ paid $2.5 billion in dividends, which have increased each year for the last 57 years, and repurchased $2.0 billion of JNJ’s common stock. Due to the strength in the business, management raised their sales outlook for the full 2019 year with reported sales expected in the range of $80.8 billion to $81.6 billion. Adjusted operational sales are expected to increase 3.2% to 3.7% for the year with adjusted operational EPS expected in the range of $8.73 to $8.83. Buy.

Ross Stores rang up a 6% increase in first fiscal quarter sales to $3.8 billion with EPS up 4% to $1.15. Comparable store sales increased 2% due to an increase in the average basket. The company is on track to meet the goal of opening 100 new stores during fiscal 2019, including 75 new Ross Stores and 25 new dd’s DISCOUNTS. During the quarter, Ross Stores generated $413 million in free cash flow, up 5% from last year, with the company returning nearly $413 million to shareholders through dividend payments of $94 million and share repurchases of $320 million at an average cost of $94.12 per share. Ross Stores ended the quarter with $1.4 billion in cash and $2.8 billion in long-term debt on its balance sheet. Ross Stores projects EPS for the 52 weeks ending February 1, 2020, to be in the range of $4.38 to $4.52, up from $4.26 last year, which included a $.07 per share benefit in the fourth quarter from the favorable resolution of a tax matter. Buy.

Ulta Beauty rang up a stylish 13% increase in first fiscal quarter sales to $1.7 billion with EPS up 21% to $3.26. Comparable sales increased 7%, driven by 4.3% transaction growth and 2.7% growth in average ticket. During the quarter, the company generated nearly $200 million in free cash flow and repurchased $107 million of its shares. Full fiscal year sales growth is expected in the low double-digit percentage range on same stores growth of 6%-7%, including e-commerce growth of 20%-30%. Ulta raised its EPS guidance to between $12.83-$13.03 from $12.65-$12.85. This new guidance assumes $700 million in share repurchases during the fiscal year. Buy.

FASTENAL DIVIDEND YIELDS 3.0%

ROSS STORES OPENING 100 NEW STORES

QUARTERLY RATING CHANGE FROM HOLD TO BUY

ULTA BEAUTY RAISED EPS OUTLOOK

JOHNSON & JOHNSON 57 YEARS OF DIVIDEND HIKES

CANADIAN NATIONAL DOUBLE-DIGIT EPS GROWTH


MARKET LEADER UnitedHealth Group traces its roots to Dr. Paul Ellwood, the health-policy guru who coined the term “health maintenance organization” during the 1960s. In 1977, Paul Ellwood helped entrepreneur Richard Burke establish United Healthcare to manage the newly created Physicians Health Plan of Minnesota, an early HMO. By combining best practices in medical care with the best thinking in business management, the company’s founders sought to improve the health of patients by expanding health coverage options and strengthening the health care system. Since its founding, the firm has consistently differentiated itself from its peers through the effective use of technology to improve care. Today, UnitedHealthcare, the firm’s health care insurance arm, collaborates with Optum, its information and technology-enabled health services arm, to deliver better clinical outcomes while bending the cost curve.

UnitedHealthcare, UNH’s total 2018 revenues and 53%

of its operating income, provides insurance to 50 million people. As the nation’s largest health insurer, the firm provides insurance through employer and individual plans, Medicare Supplemental and Advantage plans, Medicare plans plus benefits and health care delivery in more than 130 countries worldwide.

Optum, which generated 19% of UNH’s total 2018 sales and 47% of its operating income, provides technology enabled health services for patients, providers, pharmacies, hospitals, payers and life sciences organizations. The largest business within Optum is OptumRX, a pharmacy benefit manager (PBM), that generated over 20% of UNH’s 2018 operating income and served 65 million people nationwide. OptumHealth provides health care services to over 14 million patients through more than 36,000 physicians

NEW STOCK UNITEDHEALTH GROUP (UNH-$244.71)

9900 Bren Road East, Minnetonka, MN 55343

and 900 primary, urgent and surgery care centers. OptumInsight provides data analytics, artificial intelligence, consulting and management solutions. OptumInsight serves three out of four U.S. payers helping them improve health outcomes while reducing costs. Furthermore, four of five U.S. hospitals rely on Optum IT to process $65 billion in annual billings.

Integration of UnitedHealth Group’s health insurance business with Optum provides the company with a significant competitive advantage, namely lower costs. Given its low cost producer advantage and its long history of remaining on the leading edge of healthcare industry changes, UNH is well positioned to navigate through future healthcare reform.

PROFITABLE GROWTH

During the past five years, UNH has grown revenues at a healthy 15% annual rate with net income and EPS compounding even higher at 21% annual rates, respectively. UnitedHealth Group’s return on shareholders’ equity averaged 18.4% during the last decade, including 22.1% in 2018. This demonstrates the company’s well-established capital allocation strategy.

GROWING DIVIDENDS UnitedHealth Group has increased its dividend at or above a 20% clip

during the past decade with the dividend compounding at a 25% annual rate during the past five years. For fiscal 2019, the company increased its dividend by 20% to an annual rate of $4.32.

SECOND QUARTER RESULTS UnitedHealth Group reported second quarter revenues increased 8% to $60.6 billion with net income increasing 13% to $3.3 billion and EPS up 15% to $3.42. During the first half of 2019, the company generated $8.1 billion in free cash flow, representing a free cash conversion rate of 1.2 times earnings. During the first half of 2019, the company returned $6.4 billion to shareholders through dividends of $1.9 billion and share repurchases of $4.5 billion at an average price of $247.25 per share.

2019 OUTLOOK Management expects 2019 revenue to be at or slightly below prior guidance of $243 billion to $245 billion, reflecting the loss of Cigna as a PBM customer due to its merger with Express Scripts. EPS is now expected in the $13.95 to $14.15 range, up from prior guidance of $13.80 to $14.15. Investors seeking healthy long-term returns should consider buying UnitedHealth Group, a HI-quality market leader with profitable growth, growing dividends and a favorable outlook. Buy.

UnitedHealth Group is the largest U.S. health care management company offering a broad spectrum of products and services including private health insurance, health plan administration, pharmacy benefit management, ambulatory care and healthcare analytics. Through its two complementary platforms, UnitedHealthcare for health benefits and Optum for optimizing healthcare services, the company serves about 143 million people worldwide.

Fiscal Year Dec.

4-YR CAGR

2018

2017

2016

2015

2014

Revenues (000,000) 14.8% $226,247 $201,159 $184,840 $157,107 $130,474

Net Income (000,000) 20.9% $11,986 $10,558 $7,017 $5,813 $5,619

EPS 20.9% $12.19 $10.72 $7.25 $6.01 $5.70

Dividends 25.1% $3.45 $2.88 $2.38 $1.88 $1.41

Profit Margin 5.3% 5.2% 3.8% 3.7% 4.3%


STRONG BRAND LOYALTY TJX traces its roots back to 1976 when Ben Cammarata, general merchandising manager of Marshalls, was recruited to develop and lead the launch of a new off-price chain selling family apparel and home fashions. Under Ben’s leadership, T.J. Maxx was born, with its first two stores opening in Massachusetts during 1977. TJX has continued to grow steadily over the years, opening stores in new markets, countries and continents. TJX is also launching new chains and acquiring other retailers to bring its popular off-price model to an even wider network of customers. In 1990, TJX acquired a five-store chain called Winners, which has grown into a winner by becoming Canada’s leading off-price retailer. In 1992, HomeGoods was introduced to expand TJX’s presence in the booming home fashions market. T.K. Maxx was launched in 1994 and introduced the off-price concept to the United Kingdom. In 1995, TJX acquired Marshalls, which doubled the company’s size. The newest divisions include HomeSense and Sierra Trading Post, an online retailer rebranded as Sierra. TJX launched its e-commerce site in 2013 and opened its 4,000

th store in 2017.

TJX delivers a rapidly changing assortment of quality, brand name merchandise at prices 20%-60% less than department and specialty store regular prices. TJX can offer these savings because of its opportunistic buying strategies. As the largest off-price retailer, TJX has tremendous buying power and solid relationships with more than 21,000 merchandise vendors in 100 countries. This retail recipe engenders strong brand loyalty from consumers of all ages.

PROFITABLE GROWTH Over the past five years, TJX has grown sales at a spiffy 8% annual rate. During

UNDER THE SPOTLIGHT The TJX Companies, Inc. (TJX-$51.55)

770 Cochituate Road, Framingham, MA 01701 www.tjx.com

the same period, earnings and EPS compounded at 8% and 12% annual rates, respectively. TJX’s return on equity averaged a highly fashionable and profitable 53% during the past five years. In fiscal 2019, TJX rang up $39 billion in sales, more than double its sales a decade ago and up 9% over last year on a 6% comparable store sales increase. Same store sales have increased each year for 23 consecutive years. The company has reported only one year with a decline in same store sales over its 40-plus year history, a truly remarkable retail achievement. During fiscal 2019, TJX grew total square footage by 4%, adding a net total of 236 stores, and ending the fiscal year with 4,306 stores. This is a terrific feat particularly during another year with thousands of retail store closings. Return on equity in fiscal 2019 was a fancy 61%. Second fiscal quarter revenues rose 5% to $9.8 billion driven by 2% same sales growth with comp sales growth in all four major divisions due primarily to customer traffic increases. Net earnings increased 3% to $759 million, impacted by higher wage and freight costs, with EPS up 7% to $.62 on lower shares

outstanding. With the third quarter off to a solid start, management reaffirmed its full year EPS outlook to a range of $2.56 to $2.61, representing 5% to 7% growth, with same store sales growth of 2% to 3% anticipated.

OUTSTANDING CASH FLOWS During the first half, the company paid $517 million in dividends and repurchased 12.3 million shares of its common stock for $650 million at an average price of $52.85 per share. As part of its disciplined capital allocation policy, TJX increased its fiscal 2020 dividend by 18% to $.92 per share marking the 23rd consecutive year of dividend increases. During this period, the dividend has grown at a 22% compound annual rate. TJX expects to repurchase $1.75 billion of stock for the full fiscal 2020 year. TJX ended the first half with $2.2 billion in cash and investments, reflecting the company’s strong cash flow generation and financial flexibility. Long-term investors shopping for a bargain should consider The TJX Companies, a well-managed HI-quality business with strong brand loyalty, outstanding cash flows, steadily growing dividends and substantial share repurchases. Buy.

The TJX Companies is the leading global off-price retailer of apparel and home fashions. As of Aug. 3, 2019, TJX operated a total of 4,412 stores in nine countries, including 1,260 T.J. Maxx, 1,107 Marshalls, 783 HomeGoods, 39 Sierra, and 23 Homesense stores, as well as tjmaxx.com and sierra.com in the United States; 274 Winners, 132 HomeSense, and 91 Marshalls stores in Canada; 580 T.K. Maxx and 72 Homesense stores, as well as tkmaxx.com, in Europe; and T.K. Maxx stores in Australia.

Fiscal Year Jan.

4-YR CAGR

2019

2018

2017

2016

2015

Sales (000,000)

7.6% $38,973 $35,865 $33,184 $30,945 $29,078

Net Income (000,000)

8.4% $3,060 $2,608 $2,298 $2,278 $2,215

EPS 11.5% $2.43 $2.02 $1.73 $1.67 $1.57

Dividends 22.2% $0.78 $0.625 $0.52 $0.42 $0.35

Profit Margin 7.9% 7.3% 6.9% 7.4% 7.6%


SUBSCRIPTION INFORMATION Hendershot Investments is published quarterly by Hendershot Investments, Inc., 11321 Trenton Court, Bristow, VA 20136. Phone: (703)-361-6130. Subscription price: $50 per year. Photocopying, reproduction or quotation is strictly prohibited without written permission. Information presented here was obtained from sources believed to be reliable but accuracy and completeness and opinions based on this information are not guaranteed. It should not be assumed that recommendations will be profitable or will equal the performance of securities listed here or recommended in the past. All data, information and opinions expressed are subject to change without notice. Further information on companies mentioned in this newsletter is available upon request.

SUBSCRIPTION INFORMATION Hendershot Investments is published quarterly by Hendershot Investments, Inc., 11321 Trenton Court, Bristow, VA 20136. Phone: (703)-361-6130. Subscription price: $50 per year. Photocopying, reproduction or quotation str ictly prohibited without wr itten permission. Information presented here was obtained from sources believed to be reliable but accuracy and completeness and opinions based on this information are not guaranteed. It should not be assumed that recommendations will be profitable or will equal the performance of securities listed here or recommended in the past. All data, information and opinions expressed are subject to change without notice. Further information on companies mentioned in this newsletter is available upon request.

SUBSCRIPTION INFORMATION Hendershot Investments is published quarterly by Hendershot Investments, Inc., 11321 Trenton Court, Bristow, VA 20136. Phone: (703)-361-6130. Subscription price: $50 per year. Photocopying, reproduction or quotation is strictly prohibited without written permission. Information presented here was obtained from sources believed to be reliable but accuracy and completeness and opinions based on this information are not guaranteed. It should not be assumed that recommendations will be profitable or will equal the performance of securities listed here or recommended in the past. All data, information and opinions expressed are subject to change without notice. Further information on companies mentioned in this newsletter is available upon request.

TECHNOLOGY LEADER Larry Ellison, who owns 30.6% of Oracle’s stock and continues to serve as Chairman and Chief Technology Officer, founded the company in 1977. Since introducing its first database software in 1979, Oracle has grown to become a global technology market leader with sales topping $39 billion. In fiscal 2019, Oracle’s cloud services & license support, cloud license & on-premise license, hardware and services businesses represented 68%, 15%, 9% and 8% of total sales, respectively. To transition its business into the cloud, management plans to leverage its large operating scale, which includes a 50% share of the global database management market; its technology breadth, which stems, in part, from key acquisitions; and its large installed base of more than 430,000 worldwide customers. To support its cloud transition and drive growth during the past five years, Oracle has invested nearly $30 billion, or 15% of its revenues, in research and development.

FINANCIAL STRENGTH For fiscal 2019, revenues increased 3% on a constant currency basis with reported revenues relatively flat at $39.5 billion. Net income and EPS each more than tripled. On an adjusted basis, EPS increased 16%. Return on shareholders’ equity in fiscal 2019 was an outstanding 50%. These solid results were driven by the company’s high margin Fusion and NetSuite cloud applications businesses which continue to grow rapidly while Oracle downsizes their low-margin

legacy hardware business. The shift from commodity hardware to cloud applications resulted in an adjusted operating margin of 47%, the highest the company has generated in five years. Oracle is gaining market share in the cloud applications business. During the fourth quarter, the company added over 5,000 new Autonomous Database trials. This new Gen2 Cloud Infrastructure offers a self-driving database that automatically encrypts all data, backs itself up, tunes itself, upgrades itself and patches itself when a security threat is detected all without the need of human intervention or downtime.

Oracle’s profitable operations generate strong cash flows. With minimal capital expenditure needs, Oracle’s free cash flow has significantly exceeded net income over the years, a sign of high-quality earnings. Over the last decade, free cash flow has grown from $7.7 billion to $13 billion at the end of fiscal 2019. As of 5/31/19, Oracle’s balance sheet boasted nearly $38 billion in cash

and marketable securities and $52 billion in debt. This $14 billion of net debt comes despite several large, fast-growing acquisitions, including Fusion and NetSuite, and a 25% reduction in Oracle’s outstanding shares during the past five years, with nearly 60% of the total reduction in fiscal 2019. During the year, Oracle repurchased a whopping 734 million shares for a total of $36 billion. Between the share buyback and dividend, Oracle returned $39 billion to shareholders in fiscal 2019.

ATTRACTIVE VALUATION Oracle’s dividend currently yields 1.7%. With a relatively low 27% dividend payout, the company has ample room to increase the dividend steadily even while it transitions its business to the cloud. Based on

Oracle’s current market capitalization, the stock is attractively valued with a free cash flow yield of 7%. Long-term investors should add Oracle to their database, a HI-quality technology market leader with financial strength and an attractive valuation. Buy.

SUBSCRIPTION INFORMATION Hendershot Investments is published quarterly by Hendershot Investments, 11321 Trenton Court, Bristow, VA 20136. 703-361-6130. Subscription price: $50 per year. Photocopying, reproduction or quotation str ictly prohibited without written permission. Information presented here was obtained from sources believed to be reliable but accuracy and completeness and opinions based on this information are not guaranteed. It should not be assumed that recommendations will be profitable or will equal the performance of securities listed here or recommended in the past. All data, information and opinions expressed are subject to change without notice. Further information on companies mentioned in this newsletter is available upon request.

UNDER THE SPOTLIGHT ORACLE (ORCL-$53.87)

500 Oracle Parkway, Redwood City, CA 94065 www.oracle.com

Fiscal Year May

4-YR CAGR

2019

2018

2017

2016

2015

Sales (000,000) 0.8% $39,506 $39,383 $37,792 $37,047 $38,226

Net Income (000,000) 2.8% $11,083 $3,587 $9,452 $8,901 $9,938

EPS 7.7% $2.97 $0.85 $2.24 $2.07 $2.21

Dividend 12.3% $0.81 $0.76 $0.64 $0.60 $0.51

Profit Margin 28.1% 9.1% 25.0% 24.0% 26.0%

Oracle provides products and services for all aspects of corporate IT environments—applications, platform and infrastructure. Oracle offers database software and tools, cloud engineered systems and enterprise software including database development tools, middleware software products, enterprise resource planning software, Human Capital Management software, customer relationship management software and supply chain management software.

deal or no deal?...during the upcoming fourth quarter conference call, we will carefully evalu-ate...

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